Accounting Policy on Goodwill and Intangible Assets

Goodwill

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.

Intangible Assets

Microsoft’s intangible assets are subject to amortization and are amortized using the straight-line method over their estimated period of benefit, ranging from one to 20 years. Microsoft evaluates the recoverability of intangible assets periodically by taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired.

Amount after accumulated impairment loss of an asset representing future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.

Microsoft Corp.’s goodwill increased from 2017 to 2018 and from 2018 to 2019.

Intangible assets and goodwill

Sum of the carrying amounts of all intangible assets, including goodwill, as of the balance sheet date, net of accumulated amortization and impairment charges.

Microsoft Corp.’s intangible assets and goodwill decreased from 2017 to 2018 but then increased from 2018 to 2019 exceeding 2017 level.

An activity ratio calculated as total revenue divided by adjusted total assets.

Microsoft Corp.’s adjusted total asset turnover ratio improved from 2017 to 2018 and from 2018 to 2019.

Adjusted financial leverage

A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.

Microsoft Corp.’s adjusted financial leverage ratio decreased from 2017 to 2018 and from 2018 to 2019.

Adjusted ROE

A profitability ratio calculated as adjusted net income divided by adjusted shareholders’ equity.

Microsoft Corp.’s adjusted ROE deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

Adjusted ROA

A profitability ratio calculated as adjusted net income divided by adjusted total assets.

Microsoft Corp.’s adjusted ROA deteriorated from 2017 to 2018 but then improved from 2018 to 2019 exceeding 2017 level.

A measure of financial leverage calculated as adjusted total assets divided by adjusted total equity.Financial leverage is the extent to which a company can effect, through the use of debt, a proportional change in the return on common equity that is greater than a given proportional change in operating income.

Microsoft Corp.’s adjusted financial leverage ratio decreased from 2017 to 2018 and from 2018 to 2019.